Kinder Morgan charts course for growth, despite headwinds

By Robert Grattan | Houston Chronicle

Published 7:43 am, Tuesday, February 3, 2015

Photo: Brett Coomer

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Jose Balderas, Kinder-Morgan operations manager for the Yates field, checks one of the Co2 injection well heads, that uses solar and wind energy to power the well head, Thursday, June 2, 2011, in Iraan. The Yates oil field is one of the oldest in Texas. The Yates field has been producing continuously since the 1920s. ( Brett Coomer / Houston Chronicle ) less

Jose Balderas, Kinder-Morgan operations manager for the Yates field, checks one of the Co2 injection well heads, that uses solar and wind energy to power the well head, Thursday, June 2, 2011, in Iraan. The ... more

The Houston-based company, which owns a sprawling empire of pipelines and other midstream infrastructure across the U.S. and Canada, reaffirmed its earlier projection that its dividend will grow 10 percent annually while Kinder Morgan maintains enough cash on hand to insulate it from falling commodity prices.

Company officials said Kinder Morgan will reach its goals by expanding its businesses and betting on natural gas, which it expects will continue to drive demand for pipelines and other transportation services.

CEO Richard Kinder said producers will have to move natural gas across the continent to chemical plants, power generators and ports for shipment overseas.

“Natural gas to me is still the greatest story in energy. It’s clean, it’s abundant and it’s affordable,” said Richard Kinder, CEO of Kinder Morgan. “It’s a humongous opportunity.”

The growth rate is ambitious for a company that already is an energy giant.

Kinder Morgan has grown from an enterprise value of $349 million at its inception in 1996 to $132 billion today. Kinder Morgan is now the nation’s largest midstream company and the third-largest energy company by enterprise value.

Acquisitions

In August, company executives revealed part of their growth strategy in announcing a $44 billion transaction fusing several affiliated master limited partnerships into Kinder Morgan Inc. The deal left Kinder Morgan with a single publicly traded stock and, executives said Wednesday, significantly lowered costs of capital. In short, it now has access to a lot of cash.

Last week, the new company made its first acquisition move when it said it would pay $3 billion for Hiland Partners, a Bakken Shale pipeline company founded by Continental Resources CEO Harold Hamm. The deal gives Kinder Morgan a foothold in one of the few shale plays where it isn’t already working.

Executives didn’t announce any new deals during the investor event Wednesday at the Doubletree Hotel downtown. But top management and analysts who follow the company have said to expect more acquisitions — especially as potential targets struggle amid low commodity prices.

“We’re very well positioned,” said Steve Kean, Kinder Morgans’ president and chief operating officer. “Whether its several $3 billion deal or a big tens-of-billions deal, or a combination of the two, it’s a rich environment.”

Commodity prices

Falling natural gas and crude prices aren’t expected to dampen results significantly, executives said. Kinder Morgan often compares its business to a toll road, drawing income for providing transportation infrastructure regardless of the price of what’s shipped.

But Kinder Morgan isn’t completely immune from the effects of falling prices.

Its carbon dioxide segment, for example, transports the gas and injects it into reservoirs to force more crude out. That oil is subject to price fluctuations.

The division produced more than 40,000 barrels of oil per day in 2014 and is budgeted to produce more in 2015, but this year’s production is about 79 percent hedged locking in a price of $80 a barrel.

Still, Kinder Morgan estimates that a $1 dollar per barrel change in crude oil prices corresponds to a $10 million change in the amount of cash it has available to pay as dividends. For natural gas, a price change of 10 cents per million British thermal units has a $3 million effect on cash flow. At an annual crude oil prices of $40 per barrel and natural gas prices of $3, the company estimated it would still have $330 million left over after paying its dividend.

Executives were confident they could continue to grow in the face of falling prices that have induced producers to pare back upstream growth. Those pullbacks are expected by some analysts to flatten U.S. oil and gas production growth at least in the near term — eventually reducing strangling some of the crude and gas that Kinder Morgan hopes to carry across the country.

In a note to clients on Wednesday before the presentation, analysts at energy investment bank Tudor, Pickering, Holt & Co., LLC said Kinder Morgan’s growth target may be a “long putt” given flat or declining production volumes through 2016.

Traders have so far been optimistic about Kinder Morgan’s future as well.

The company’s stock has risen almost 10 percent in the past six months. The S&P 500 Energy Index is down 23.9 percent for the same period. Kinder Morgan announced the combination of its various subsidiaries in August and closed the deal in November.